A sovereign risk index for the Eurozone based on stochastic dominance

Elettra Agliardi, Mehmet Pinar and Thanasis Stengos

Finance Research Letters, 2014, vol. 11, issue 4, 375-384

Abstract: We propose a new method to assess sovereign risk in Eurozone countries using an approach that relies on consistent tests for stochastic dominance efficiency. The test statistics and the estimators are computed using mixed integer programming methods. Our analysis is based on macroeconomic fundamentals and their importance in accounting for sovereign risk. The results suggest that net international investment position/GDP and public debt/GDP are the main contributors to country risk in the Eurozone. We also conduct ranking analysis of countries for fiscal and external trade risk. We find a positive correlation between our rankings of the most vulnerable countries and the S&P’s ratings, whereas the correlation for other countries is weaker.

Keywords: Sovereign risk; Eurozone; Nonparametric stochastic dominance (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C15 G01 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: A Sovereign Risk Index for the Eurozone Based on Stochastic Dominance (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:4:p:375-384

DOI: 10.1016/j.frl.2014.07.002

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